The Walt Disney Company (DIS, Financial) looked cheap in November and then again in May. Both times, the stock was under $103 per share. Now at $112, with the Fox merger approved by shareholders, it’s left to the regulators to approve the $71.3 billion deal.
If finalized this year, the next two years could have the stock in the $150 to $200 range and long term, Disney is worth a lot more than its $168 billion market capitalization, even if putting Fox under the Disney umbrella will add much more debt. Disney is easily worth twice what the market value is today. The question is, how soon will investors realize that gain?
Last Tuesday, Disney was down 2.5% in after hours following the release of its financial performance. The company missed analyst expectations on top and bottom lines in the third quarter despite solid gains in core segments and stronger results from the studio.
But despite falling short of “consensus,” the brand is only getting stronger. Net income rose 23% and revenue rose 7.3% year-over-year. Earnings per share for the first nine months were $6.81 versus $4.55 from the prior-year period, and book value continues to rise.Â
Revenue across the company's main segments was mostly up. Media Networks was up 5% to $6.16 billion; Parks and Resorts was up 6% to $5.19 billion; Studio Entertainment was up 20% to $2.88 billion; and only the Consumer Products and Interactive Media segment was down, coming in at $1 billion, off 8%. Disney is highly efficient at turning sales into profit.
Now it will have Rupert Murdoch’s treasure trove, which represented a once-in-a-lifetime opportunity to gain the bulk needed as a counterattack the technology giants that continue to aggressively move into Hollywood. Disney will now be set to earn money on the Avatar and X-Men movies, as well as TV shows such as “The Simpsons” and “This Is Us,” which will be owned by Disney.
That adds to an already massive stockpile of content from Lucasfilm, Marvel Entertainment and Pixar Animation Studios. The deal also gives Disney the cable networks FX and National Geographic, plus arguably the most important competitive piece, a controlling stake in Hulu, which already has more than 20 million subscribers, and Star, one of India’s fastest-growing media firms. India’s appetite for content consumption is as high as America’s.
Disney is set to unveil a Netflix-style streaming service to deliver its shows and movies straight to viewers. Will it just roll Hulu up into it or make both standalone services? As FAANG stocks like Netflix, Amazon, Apple, Facebook and Google continue to build their own media and entertainment empires, Disney will need to do something to keep eyeballs on its content.
Disney CEO Bob Iger has said, “One of the most exciting aspects of our Fox acquisition is that it will allow us to greatly accelerate our direct-to-consumer strategy,” and “we believe creating a direct-to-consumer relationship is vital to the future of our media businesses, and it’s our highest priority.”
Analysts expect that Disney will clear regulatory hurdles by early 2019, and the company could become a major player in streaming by 2020. This deal will add $4 billion to $5 billion in net income and $30 billion on the top line. At 15 times earnings, that could put the market cap over $250 billion. At 20 times earnings, the cap gets up to $340 billion.
Disclosure: I am not long/short any stock mentioned in this article.
